Addressing the ‘G’ in ESG

With vast natural and green resources, Malaysia has much to offer to global investors 

WHEN the United Nations coined the term ESG (environmental, social and governance) to promote sustainable business practices in 2005, few would have envisioned the impact it has on the global business environment. 

Driven by investment banks desperate for the next easy money, and international consultants desperate for sophisticatedly convoluted methodologies to offer potential clients, the ESG elements began to take over the business community’s fascination of CSR (corporate social responsibility) in the middle of the last decade. 

The ESG profile’s extraordinary growth over the last decade is evident in the exponential increase of investment into sustainable funds. From an estimated US$17 trillion in 2014, global sustainable investment assets top US$37.8 trillion (RM167.25 trillion) at the end of 2021. According to Bloomberg estimates, these ESG funds are on track to record in excess of US$53 trillion, or a little over one-third of US$140.5 trillion projected total global assets under management, by 2025. 

Malaysia, and very much the regional economies, are still at the infancy stage of ESG investing. In the local stock market, it is estimated that only around 8% of the total portfolio are ESG-compliant. 

The government’s target to achieve carbon neutrality by 2050, nonetheless, highlighted Malaysia’s bit more progressive stance relative to other Asean countries. Five pillars were identified — deploying renewable energy (RE), managing carbon emission, water and waste, driving the development of sustainable cities and accelerating the green economy. 

Private corporations are also actively pursuing their own ESG initiatives. Some companies went aggressive — the national utility company Tenaga Nasional Bhd for instance — outlined its own roadmap in response to the government’s 2050 ambition by committing to focus on RE and invest RM20 billion a year to achieve net zero in their TNB Sustainable Pathway 2050 plan. 

Other companies took a softer approach by focusing on low-hanging fruits such as energy consumption as a key area in their commitment. 

Sustainable development credentials however took a beating as high-profile cases of “greenwashing” was exposed recently. Weeks ago in the UK, the global-local bank, HSBC, was banned by the UK advertising watchdog for their misleading adverts on its role in the climate crisis. 

Greenwashing is the process of conveying false and misleading information about a company’s products or services’ environmental impact. 

In the lead-up to the COP26 climate change conference in Glasgow in October 2021, HSBC published posters claiming that it invested US$1 trillion in climate-friendly initiatives such as tree planting and helping clients achieve climate targets, despite their continuing financing of businesses and industries that emitted high-level carbon dioxide and other greenhouse gasses. 

More recently, the multibillion-dollar collapse of the cryptocurrency exchange FTX and its controversial founder Sam Bankman-Fried, have highlighted the cracks within ESG investment’s ratings. Despite FTX’s total lack of corporate governance or fiduciary control, the crypto-con-of-a company was rated highly on ESG in the area of “leadership and governance”, notches better than the multinational ExxonMobil. 

Similar greenwashing tactics are being used by Malaysian corporates, and due to the lack of a proper oversight institution, it is being manipulated freely without proper supervision. 

Just last month a local banking institution went to town with its award — a fourth placing in ESG performance by the World Benchmarking Alliance’s inaugural 2022 Financial System Benchmark — despite its own patchy record of financing coal mining interest in neighbouring country. 

The bank officially responded by reiterating its commitment to sustainability agenda but stopped short of addressing the actual questions arising from the fresh April 2021 financing of the coal mine. 

Not a single authority is challenging the merits of the bank’s argument, and from an investor’s perspective, it is a basic question that needs to be answered. 

Who should govern these ESG initiatives? How can we avoid further greenwashing from corrupting Malaysia’s credentials? Who ratifies these claims and announcements, and more importantly, what benchmarking are we using? 

With the increasing flow globally, Malaysia couldn’t afford to miss latching on to the global ESG funds excitement. With vast natural and green resources, Malaysia has much to offer to global investors. 

With the new government, and with the lackadaisical pace that our neighbouring countries are taking, we are already at an advantageous position to start anew on our sustainability drive. 

Now we just need a governing authority to take control and provide the governance needed in the ESG. 

Asuki Abas is the editor at The Malaysian Reserve.

  • This article first appeared in The Malaysian Reserve weekly print edition